Standing Committee A

[Mr. Derek Conway in the Chair]

Local Government Bill

Derek Conway: I am sure that the Minister for Local Government and the Regions can think of no better way to mark his birthday than to be with us in Committee. I congratulate him and the hon. Member for Burton (Mrs. Dean) on a very special day. We will try to make it enjoyable for them.

Philip Hammond: On a point of order, Mr. Conway. You may have read speculation in the press about the possibility of a challenge by the Fire Brigades Union to the Government's proposal to bring forward in Committee an amendment repealing section 19 of the Fire Services Act 1947. I understand that the basis of that challenge would be that the Government failed to carry out the necessary adequate consultation before making legislative proposals.
 One way to air the issues behind this particular legislative proposal adequately and thus perhaps to head off a judicial review challenge would be for adequate time to be provided in this Committee for the consideration of any proposed Government new clause. Have you had any approach from any members of the Committee about the possibility of reconvening the Programming Sub-Committee to ensure that adequate time is available to debate any such Government new clause? It would allow the Government to protect themselves against the charge of bringing forward measures that have not been adequately reviewed and considered.

Edward Davey: Further to that point of order, Mr. Conway. I support what the hon. Member for Runnymede and Weybridge (Mr. Hammond) has said. The Programming Sub-Committee should meet to consider the point he makes. It is important that these matters are fully considered so that a judicial review can be headed off. May I further add that it would be helpful if the Government could table early any related new clauses so that they could be considered by the Committee and others outside it well before we debate them formally? While we suspect that the new clause will be simple, it should be before the House as early as possible.

Derek Conway: Clearly what the courts do is not a matter for me in the Chair. However, I am sure that the usual channels will have noted what has been said. If there is request to reconvene the Programming Sub-Committee the Chair will co-operate with that.

Nick Raynsford: Further to that point of order, Mr. Conway. First, may I thank you for your kind good wishes on this auspicious day? Secondly, as the Committee will be aware, the timetable for the Committee proceedings was announced in the full
 knowledge that the Government intended to move the repeal of parts of section 19 of the Fire Brigades Act and that was certainly taken into account in the timetabling. The judicial proceedings, which we believe are unjustified and without merit, do not hinge on whether the Committee has sufficient time to debate the issue. I honestly do not believe that hon. Members' request for additional time to debate this would have any bearing on the judicial proceedings if they were to be countenanced.

Clause 4 - Imposition of borrowing limits

Amendment proposed [21 January 2003]: No. 6, in 
clause 4, page 2, line 26, after 'the', insert 'aggregate level of'.:—[Mr. Hammond.]
 Question again proposed, That the amendment be made.

Derek Conway: I remind the Committee that with this we are discussing the following amendments:
 No. 28, in 
clause 4, page 2, line 26, at end add 
 'and the allocation of a share in such aggregate limits to individual local authorities.'.
 No. 7, in 
clause 4, page 2, leave out from beginning of line 27 to end of line 2 on page 3 and insert— 
 '(2) No regulations may be made under this section unless— 
 (a) the Secretary of State has consulted such representatives of local government as appear to him to be appropriate; 
 (b) he has laid before each House of Parliament a report explaining the reasons why he considers it necessary that the regulations be made; and 
 (c) the report has been approved by resolutions of each House of Parliament. 
 (3) Sections 117(1) and (2) do not apply to regulations made under this section.'
 No. 49, in 
clause 4, page 2, line 27, leave out subsection (2). 
No. 29, in 
clause 4, page 2, line 28, leave out from 'authority' to end of line 29 and insert 
 'where he considers that the local authority has not, in setting a borrowing limit under section 3(1), had proper regard to the requirements of section 3(2).'.
 No. 31, in 
clause 4, page 2, line 31, at end insert— 
 '( ) A limit set under subsection (1) or (2) may not, in respect of any local authority, be set at a level less than the level of that local authority's borrowing on the date that the draft regulation is laid.'.

Philip Hammond: At this stage I shall not press the amendments. However, we will vote against the clause on stand part. I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Question proposed, That the clause stand part of the Bill.

Derek Conway: With this it will be convenient to discuss new clause 2—Imposition of borrowing limits (No. 2)—
'—.(1) The Secretary of State may by regulations set limits in relation to the borrowing of money by local authorities. 
 (2) The Secretary of State may only make regulations under subsection (1) if the Code for Fiscal Stability, as provided for in section 155 of the Finance Act 1998, would otherwise be breached in any way. 
 (3) Before the Secretary of State may make regulations under subsection (1), the Treasury must prepare and lay before Parliament a document which shall be subject to approval by a resolution of the House of Commons explaining how the Code for Fiscal Stability would otherwise be breached if limits were not set in relation to the borrowing of money by local authorities. 
 (4) It shall be the duty of the Comptroller and Auditor General to examine the Treasury's document published under subsection (3) and report to the House of Commons his findings.'.

Edward Davey: New clause 2 represents a much better approach than the Government's approach because it sets a much clearer description of the circumstances in which macro-economic reasons would trigger the Government's right to interfere in the borrowing of local authorities. As clause 4 stands, we do not know what those reasons might be, because subsection (1) says only that regulations will set guidelines for capping local authorities' borrowing for ''national economic reasons''.
 ''National economic reasons'' is a broad and vague term. We have had Ministers' assurances in the explanatory notes and in debates that that would be a long-stop and reserve power that would rarely be used, but we still do not know what the national economic reasons are. There has been no description or attempt to set criteria in debates, the explanatory notes or elsewhere, which seems odd. The term could cover many issues that are not necessarily relevant to borrowing. There may be economic reasons why the Government feel that they have to take some measures, but those economic reasons should be germane to the borrowing of local authorities. 
 That is why new clause 2 talks about the Government's own code for fiscal stability. It was provided for in the Finance Act 1998 and has been continually referred to in Budgets and pre-Budget reports. It sets out the objectives of fiscal policy and the rules by which those objectives will be met. In theory, they are binding on central Government, but, as Governments always do, they have given themselves an opt-out clause. However, the code is supposed to set the framework in which fiscal policy is to be delivered in the long term. For example, it requires the Treasury to make a long-term forecast of the fiscal position of UK plc and sets out whether the public finances are sustainable in different conditions. It has two rules that underpin the fiscal policy. There is the golden rule, which is that over the economic cycle the Government will borrow only to invest and not to fund current spending, and the sustainable investment rule, which relates to public sector net debt as a proportion of GDP. 
 My point is that the Government have an elaborate code and underpinning rules to direct their fiscal policy. A lot of analysis follows those rules, and it is logical that local authorities should fit into that framework. Their borrowing and fiscal actions must 
 be taken into account in the Government's determination of whether they are abiding by their rules and sticking to their code for fiscal stability. 
 New clause 2 would not use such broad, unspecified ''national economic reasons'' that do not relate to local authority borrowing, but instead take the Government's framework for fiscal policy and include local authorities' fiscal actions within it. I do not think that it is a particularly outrageous request from the Opposition for the Government to keep to their code for fiscal stability.

Philip Hammond: We are the Opposition.

Edward Davey: The hon. Gentleman says that, but many people in the United Kingdom do not think that the Conservatives are a good Opposition and are instead looking to the Liberal Democrats to provide the opposition. I am grateful to him for giving me the chance to put that on the record.
 The Government should accept new clause 2. It might mean that they have to treat local government with a little more respect. The Government's attitude to local authorities is that the Government should be able to set regulations when they decide that it is right, but they should treat local government with more respect and apply the same codes and rules to local government as they do to themselves. I therefore urge the Minister to reconsider.

Andrew Turner: I am interested in the hon. Gentleman's argument that the rules and codes that apply to the Government should also apply to local government. Will he accept that the money supply, for example, is within the control of the Government, so they should have some responsibility in respect of limiting local authority borrowing and expenditure?

Edward Davey: That is an interesting point, although we are in danger of going down the route of the debate that took place in the early 1980s between monetarists and neo-Keynesians about the real effects and causalities in respect of the money supply. I thought that that argument had been put to bed, and that most people did not believe that fiscal policy had a very big impact on the money supply but believed that monetary policy had by far the most significant effect. The hon. Gentleman may want to have a debate on macro-economic theory, but local authority borrowing and Government borrowing are a very small aspect of the overall money supply.
 I was trying to say that the fiscal framework that is embedded in the code for stability takes all those issues into account. If the Government as a whole, local and central, stick by the code for fiscal stability, the theory is that there will not be the damaging side effects to which I think the hon. Gentleman alluded, so his point is covered whatever economic ideology he currently subscribes to. 
 I hope that the Minister will regard new clause 2 as helpful, because it specifically relates the Government's own policy to a point in the Bill at which it should be directed.

Philip Hammond: Yes, we are the Opposition and consistently so, unlike the Liberal Democrats, who
 want to play at being an Opposition to the Government in England while at the same time propping up the Labour party in its minority Administrations in Scotland and Wales.
 It is interesting to hear the hon. Gentleman dismiss so readily and easily the relevance of Government borrowing as a component of the money supply. That may be a warning that, if the Liberal Democrats were ever to get their hands anywhere near power, that component of the money supply would quickly run out of control. 
 I will comment on the Liberal Democrats' new clause 2, but I shall begin with clause 4 in general. This clause rumbles the Government. The original clause 4, which was in the draft Bill that went before the Select Committee on Transport, Local Government and the Regions, was an umbrella capital control power and perhaps more prescriptive than the existing situation. The much-quoted Mr. Travers told the Select Committee that 
''the . . . legislation would indeed allow the Government to operate a very different capital control system, one similar to or even more controlled than the present one.''
 The clause has two essential components. These are the ability of the Secretary of State by regulations to set limits for ''national economic reasons''—that rather curious term is undefined—and the power in subsection (2) to set by direction, without scrutiny, limits on the borrowing of individual authorities. In other words, the Government have retained power to get in at the front end to micro-manage and tell each authority what it can and cannot do. By virtue of having that reserve power to limit any authority's borrowing, the Government can in practice give authorities a clear steer about what they do and do not regard as acceptable in respect of their borrowing. 
 The Committee will remember that the Government resisted an amendment that would have limited their power under subsection (2) to cases in which the authority had not had sufficient regard to the specified codes of conduct and practice in setting its own borrowing limits. The Government have therefore made it clear that they want an unfettered discretionary power in dealing with individual local authorities to curb their activity and set limits for them. 
 The only legitimate area in which the Government should be concerned is the aggregate level of borrowing, because of the impact that that has on the overall fiscal and monetary macro-economic position. 
 The clause also raises more questions than it answers, because we have seen from the structure of subsection (1) that the Secretary of State, by regulations, would set borrowing limits for each authority. I therefore assume that an exhaustive list would be published of all authorities in the country, with a borrowing limit set for each. The purpose of that would not be the individual borrowing limits of each authority, but the macro-economic impact of the aggregate limit on borrowing by the local authority sector. However, the Minister has told us nothing 
 about how he would set the individual authority limits in such a situation. 
 How can Parliament be reassured that those limits will be set in an equitable way? Will the approach be based on a mechanical formula, with top-slicing of the self-imposed borrowing limits set under clause 3 by each authority, so that each authority would be limited to, for example, 75 or 80 per cent. of its borrowing limit? 
 I suspect, however, that the Minister will insist on retaining the micro-management power that will enable him to go down the list ticking off the good, the bad and the indifferent, and to set the limits according to ministerial whim. Let us hope that the limits are set on the Minister's birthday, when he might be in a good mood and might be expected to be generous to prudent authorities, rather than on one of his blacker days, when he might be tempted to display bias, the accusation of which must by now be so familiar to him that it is water off a duck's back. 
 Clause 4 introduces the curious notion of headroom and transfers between authorities, which we have not yet had the opportunity to debate. Having set debt caps on individual authorities, for the purpose of creating a limit on sectoral borrowing, the Government would then allow authorities to swap headroom, which, in effect, would create an internal market in borrowing capacity. Will the Minister comment on that? 
 I assume that it is envisaged that local authorities, for a limited period of time, would be able to sell their unused borrowing capacity to other authorities. That may sound slightly strange, but I know that that sort of thing has happened before. I was talking to a local authority a week or so ago, which had made a very nice turn in the 1980s and early 1990s by lending to Liverpool city council, when no other lender was willing to do so. Will the Minister explain how this internal market in debt capacity will work? 
 During a macro-economic crisis, in which the objective is to control total sectoral borrowing, is it sensible to envisage a system that imposes limits on individual local authorities, but then immediately opens up the opportunity for those authorities on whom the limit bites to acquire borrowing capacity from another authority—a prudent authority that has very low borrowing in relation to their ministerially set borrowing limit? There will be a tendency for the maximum borrowing limit set under the mechanism to become, through that transfer of headroom, a minimum borrowing level. Borrowing will tend to increase to the maximum permitted. That is perverse, because in a crisis where borrowing needs to be limited the objective would be to limit an individual authority's borrowing as the Minister directs—he has some discretion—and certainly not to encourage other authorities effectively to borrow or to allow borrowing against their unused capacity. I would be grateful if the Minister could clarify that point.

Edward Davey: I have been closely following the hon. Gentleman's argument. I agree with him that the clause is fairly odious. Its one redeeming aspect is the ability to share unused borrowing capacity. It is the
 only flexibility in the system, so I am surprised the hon. Gentleman speaks against it.

Philip Hammond: That depends how one views the use of the power under subsection (1). The Minister has told us that it would be used only in extremis in a national macro-economic emergency. In those circumstances it is curious to impose limits that almost certainly would not bite. There is a local authority sector debt. The Government seek to curb the growth of local authority borrowing—temporarily, I hope—for some external reason. If authorities on which the limit bites are able simply to acquire debt capacity from other authorities, the limit will not bite and the macro-economic objective will not have been achieved.

Edward Davey: I may be misunderstanding the clause, but I thought that the limit set in subsection (1) was for the total of all local authorities' debt; and, therefore, if there was room within that limit that is where the arbitrage would take place.

Philip Hammond: We do not have a draft regulation because there is no suggestion that there will be any regulations under subsection (1). The Government rejected an amendment that sought to specify an aggregate limit and an allocation of that aggregate to individual local authorities. My understanding is that each local authority will be given a limit, but perhaps the Minister will correct me. If one sat down and did the arithmetic, that would produce an aggregate limit for local authority sector borrowing. But, given the ability to trade headroom, it is not clear that that would achieve the objective effectively, efficiently and quickly in the circumstances where it is right to use subsection (1)—that is, a serious monetary crisis. I look forward to the Minister's comments.
 The general thrust of new clause 2 is similar to amendment No. 7, which requires the Government to define the national economic reasons. The Minister's courage clearly deserted him when he went to write ''crisis'' into the Bill. We have talked about a national economic crisis, but the Bill uses the word ''reasons'' instead. 
 I am not convinced that the code for fiscal stability has the relevance here on its own that the Liberal Democrats have written into new clause 2. I prefer the structure of amendment No. 7. I do not disagree with the hon. Gentleman's purposes, but the problem is that the test in subsections (2) and (3) of new clause 2 is that the code for fiscal stability would be breached if limits were not set in relation to the borrowing of money by local authorities. So many variables in terms of Government borrowing and fiscal activity would contribute to a breach of the code for fiscal stability that it would be a difficult test to satisfy that local authority borrowing had to be controlled in order not to do so. I suspect that it would never bite. Perhaps that is what the hon. Gentleman intends, and if so he will join us in voting against clause 4.

Edward Davey: The hon. Gentleman suggests that it is the intention of new clause 2 to prevent any limit
 biting on local authorities, even in the circumstances described, but it is not. The intention is to ensure that local authority borrowing is treated in the same way as other borrowing.

Philip Hammond: The hon. Gentleman clarifies the intention of the new clause, but the fact that it is being considered in a clause stand part debate suggests that parliamentary counsel views it as a wrecking proposal.
 We are happy to reassert that we will vote against the clause and I hope that the hon. Gentleman will join us. Amendment No. 7 and new clause 2 attempt to highlight and reduce the odiousness of the clause, but it would be best to vote against it as it clearly signals the Government's determination to clutch at a reserve power, which is not compatible with genuine decentralisation; it is nothing to do with granting freedom and flexibility. As the hon. Member for Southport (Dr. Pugh) said at our last sitting, the test, which I shall apply throughout the Committee stage, is whether the Government propose to allow local authorities to do what the Government do not want them to do, rather than only what the Government want them to do. Do they propose to give local authorities partial freedom to do what the Government want them to do and to retain a reserve power to prevent them doing what the Government do not want them to do?

Christopher Leslie: That is clear.

Philip Hammond: The hon. Gentleman is absolutely right. It is clear that it is the Government's intention to allow the local authorities freedom as long as they are doing what the Government want. When they think about doing what the Government do not want them to do, the reserve power is there to put them back on the Government-defined track. That is Government at their worst; dishonest about the purpose of the provision at the outset and shifty when rumbled. I hope that the Government will review the clause or, even better, at a later stage take into account at least the underlying intention of the amendments and properly scrutinise the regulations, for which there is no provision under subsections (1) and (2). If they do not do so, and unless the Minister makes a significant concession when he winds up the debate, I shall urge my hon. Friends to vote against the clause.

Nick Raynsford: I shall do my utmost to retain my usual good humour, despite the monstrous travesties and hyperbole of the hon. Member for Runnymede and Weybridge, who sought to transform a modest safety net provision into a terrible, odious construct, which the Liberal Democrats find equally objectionable. I shall deal with both points of view.
 New clause 2 is designed to replace clause 4(1), which would enable the Secretary of State to limit local authority borrowing if it was likely to exceed the nationally sustainable level. There are similarities between the new clause and amendment No. 7, which has been withdrawn, and links with the recommendation in paragraph 14 of the report on the draft Bill by the Transport, Local Government and the Regions Committee. 
 There should not be a statutory requirement for parliamentary approval before setting a national limit. If, in the unlikely hypothetical circumstances of a major financial crisis—we do not envisage such a crisis, especially while the economy continues to be as prudently managed as it is at present—it would not be appropriate for the Government to delay before taking the necessary corrective action. In any case, any action that the Government took in pursuance of their powers under clause 4(1) would be implementing policies on public expenditure that had already received parliamentary scrutiny. Nor do we believe that it is practical to specify in the Bill detailed methods for assessing national economic interests as new clause 2 proposes. We put in the reference to national economic interests in response to concerns voiced in the Select Committee to demonstrate our good will and that we will seek to use this measure only in those extreme circumstances. 
 Hon. Members will understand that one cannot anticipate the circumstances that may apply. Could anyone have imagined, other than in a Jeffrey Archer novel, the run of events that occurred at the time of this country's ejection from the exchange rate mechanism during the imprudent management of our affairs by Lord Lamont? Such circumstances could not have been anticipated—[Hon. Members: ''They were.'']—other than by someone with an extraordinary imagination. The total mismanagement of the economy and the extraordinary incompetence of senior members of the Government at that time are difficult to apprehend in today's more tranquil, rational and calm environment. But that happened. Therefore we should not anticipate that everything will continue for ever in the calm, measured, prudent form to which we are now accustomed thanks to the Government's good management of the economy.

Philip Hammond: I am delighted that the Minister has spelled out to the Committee the folly of linking a currency inextricably to another currency that has a different set of underlying economic determinants. I hope that he will be casting his vote accordingly if and when the Prime Minister ever dares consult public opinion on making a yet more irrevocable link.
 The Minister talked about the use of subsection (1) only in extremis; in serious national economic circumstances—a crisis.

Nick Raynsford: Yes.

Philip Hammond: But the Bill does not say ''crisis'', as I mentioned earlier. It says ''national economic reasons''. Does the Minister have any advice, perhaps from counsel, that ''reasons'' means extreme or crisis reasons? The words that he has put into subsection (1) do not constrain the Government in any way.

Nick Raynsford: If the hon. Gentleman feels that they do not constrain the Government he is not terribly experienced in the ways of the House. Anyone looking at the operation of these powers will question whether the national economic interest is such that it is necessary. That is a clear constraint because the Government have said that they will use these powers only for that purpose. I am not going to get
 into textual analysis over whether ''national interests'' should be substituted with ''national crisis''; I feel that ''national interests'' is a better expression. I have already indicated that those are the circumstances where these exceptional powers might be used. I will turn to the code for fiscal responsibility in a moment.

Edward Davey: Before the Minister was tempted into a debate on the European question, he said that one could not always envisage the circumstances, so he wanted to leave himself maximum flexibility. However, the code for fiscal stability allows for such flexibility. Paragraph 11 states:
''The Government may depart from its fiscal policy objectives and operating rules temporarily''.
 The flexibility in the code for fiscal stability is why we put it into new clause 2. The only difference between our approaches is that the Minister always wants to distinguish between local government and central Government borrowing. He believes that central Government borrowing should always take precedence and no consideration should be given to local authority borrowing, which can be treated willy-nilly by Whitehall. We are trying to change that; that is why new clause 2 is proposed.

Derek Conway: Before the Minister replies, I ask hon. Members to keep their interventions brief rather than making long speeches. The Committee system allows everyone to have their turn. It is quite warm in here, so if anyone wishes to remove their jacket that would be in order.

Nick Raynsford: Thank you, Mr. Conway. I am delighted to hear the tributes of the hon. Member for Kingston and Surbiton to the code for fiscal responsibility and to the Chancellor's prudent management of the economy. We are delighted to agree with him on that. However, it lead me to suspect that Liberal Democrats are beginning to dream, in the memorable words of one of their former leaders, of going back to their constituencies to prepare for power, or perhaps it was the first shot in the hon. Gentleman's campaign for the deputy leadership of his party. I should not have such unworthy thoughts.
 We are delighted that the hon. Gentleman welcomes the code for fiscal responsibility, but it would not be particularly helpful in this context. It lays down broad financial principles rather than dealing with the conditions that might apply in the extreme circumstances that I have described. I am also surprised that the new clause did not include any reference to the Audit Commission, which we would want to involve in consultations on any possible national limit, as it is the appropriate audit authority for local government. I hope that he will agree that the new clause is not useful. 
 As Members know, clause 4 gives the Government reserve powers to impose borrowing limits on authorities, which would override the affordable borrowing limits set by authorities under clause 3 in limited and exceptional circumstances. The first power is detailed in clause 4(1), which enables the Secretary of State to set borrowing limits for all authorities, but it can be exercised only for national economic reasons. As I said already, we inserted that in response to the 
 concerns expressed by the then Transport, Local Government and the Regions Committee. The clause reflects the policy of the White Paper ''Strong Local Leadership—Quality Public Services'' and the Welsh Assembly Government policy statement ''Freedom and Responsibility'', which is that the power should be used only if necessary to maintain public expenditure at nationally sustainable levels. 
 We hope that we will not need to set a national limit at the beginning of the system, but a sudden surge of borrowing could be prompted by the new prudential regime, which could create circumstances in which it could be felt necessary to do so. If we ever needed a national limit it would have to be imposed by regulations, on which we would fully consult local government. We will not draft regulations on a national limit unless and until they are required, but we are already discussing with local government representatives the possible general structure of such regulations, in case they are ever needed.

Philip Hammond: The Minister just said that the creation of the prudential regime could lead to a surge of borrowing, which would require the imposition of limits. That suggests that he is looking at local authority borrowing in isolation and contemplating the use of the provision to impose limits because of aggregate local authority borrowing, rather than looking at the total macro-economic picture. Will he confirm that that is not true, and that limits would be imposed only if local authority borrowing were creating a problem as a component of the wider picture?

Nick Raynsford: That is obviously implicit, because otherwise we would not have included the reference to the national economic interest. The hon. Gentleman is a thoughtful commentator on economic affairs, although at times he is a little obsessive on European issues—I did not rise to his challenge on that one—and I am sure that he will recognise that if local authorities, which account for a quarter of total public expenditure, were all borrowing large amounts simultaneously, they could have a disproportionate impact on overall national economic circumstances. I felt that it was right to mention that situation—but as I said, we do not envisage the circumstances meriting the imposition of a national limit at the beginning of the new system. I have said that we will consult local government, and we are already having preliminary discussions with local authorities to consider the type and general structure of regulations in case they are ever needed.
 Clause 4(2) contains a second reserve power, which would enable the Secretary of State to set a limit on the borrowing of an individual authority. That could be used only for the purpose of ensuring that an authority does not borrow more than it can afford. Again, the power is a backstop that will be available only for extreme circumstances in which individual authorities are managing their affairs in such an imprudent way that, in the interests of their council tax payers and residents, Government intervention is necessary. There 
 have been a few highly publicised examples of irresponsible behaviour by one or two local authorities, which give the whole of local government a bad name, but I hope that we have established the fact that the Government want to work constructively with local authorities as a whole to ensure that those cases are dealt with expeditiously and do not recur. 
 In response to concerns expressed by local government, we have reflected in the Bill the policy in the White Paper and the policy statement. As I have said, the limit would be imposed by direction—in other words, a letter from the Secretary of State to the authority involved. That offers flexibility, enabling the limit to be tailored to the particular case, varied or removed quickly if circumstances change. 
 Clause 4(3) provides that any limits imposed by the Government, nationally or locally, can be different for different types of borrowing. We could therefore allow borrowing for certain purposes to be subject to less stringent constraints, or exempted from the limit entirely.

Philip Hammond: How does the Minister square that with the suggestion that limits under clause 4(1) are imposed only for macro-economic purposes, with regard to the aggregate level of local authority borrowing?

Nick Raynsford: I am sure that the hon. Gentleman can envisage circumstances in which certain types of borrowing to promote national infrastructure, which is essential for economic development and prosperity, were regarded as overridingly important, and exemptions might be made as a result. Again, there is a degree of flexibility, which the hon. Member for Kingston and Surbiton rightly highlighted as important.
 Flexibility is also important in relation to subsections (4) to (6). These deal with headroom, whereby authorities will be allowed the freedom to transfer borrowing capacity between themselves. Interestingly, the hon. Member for Runnymede and Weybridge asked whether there might be trading in headroom. We do not know whether there is any now. He may be aware that there is already a system whereby authorities can pass across unused borrowing limits within the current borrowing approval system. I do not know whether there is active trading. I think that it is mainly a question of voluntary agreements between local authorities whereby one exchanges this year's headroom in return for a transfer in the opposition direction in the coming year. 
 Such arrangements should continue to be available, because within the overall national limit, it would be perfectly reasonable for authorities to shift individual borrowing decisions provided that they did not breach the overall limit. That is where the headroom allows flexibility.

Andrew Turner: We certainly cannot blame the Government for not knowing the circumstances in which headroom may currently be traded. They cannot be expected to know everything. Indeed, it is better that they do not—but will the Minister help the Committee by telling us whether, where there is not a
 reciprocal arrangement, the traded or transferred headroom might have a value that should have been taken account of by the transferring authority, and should therefore show up in some form of recompense to its ratepayers for the transferred value?

Nick Raynsford: No; we are getting into the sort of detail that is best, and properly, left to local government. There should be flexibility so that if a local authority has, say, £3 million of spare borrowing capacity because it chooses not to borrow up to its set limit within the overall national limit, it can make that available to another authority. However, it should be left to local government to make such arrangements, without a national framework.

Philip Hammond: The Minister says that he does not know whether trading in headroom goes on at the moment, but will he confirm that nothing in the Bill or the existing legislation prevents local authorities from obtaining monetary reward for releasing their headroom? Will he also explain how the transfer mechanism will work? Presumably, a local authority that transfers headroom will want to do so on a time-limited basis. Will the regulations provide for a specific structured form of releasing headroom for a period of time? If the borrowing authority defaults on returning the headroom—in other words, on reducing its debt on time—will the donor authority be penalised, or will it automatically be assumed to have reclaimed its headroom when it is contractually supposed to have done so?

Nick Raynsford: The hon. Gentleman asks two separate questions. The first is whether there is anything in the legislation to prevent trading in headroom. To the best of my knowledge, there is not. This simply enables the flexibility in the existing system that allows transfers of borrowing approvals between authorities to continue under the new system. If trading currently takes place—and I have told the Committee that I am not aware of any—there is no reason why that should not be extended under the new system.
 The second question is about the auditing arrangements for keeping track of the process. The individual authority and its auditors will be responsible for ensuring that there are robust systems in place. The hon. Gentleman is correct to say that there will be a time factor, because borrowing approvals for authorities under the current system are limited for individual years, and under the new system, the authorities will set their own prudential limits for future years. They will therefore want to be satisfied about their capacity for future borrowing. 
 There will be a proper framework, but it will be determined at a local level rather than being set by the Government. I hope that hon. Members will not encourage the Government to become involved in that process, because that looks like the sort of micro-management that hon. Members complain about. That is very far from our intention.

Philip Hammond: I understand the point that the Minister made, and to some extent sympathise with it, but he cannot avoid being cast in that role. Subsection (5) states:
''The Secretary of State may by regulations make provision about the exercise of the right''
 under subsection (4). 
 Therefore, the mechanism for the transfer of headroom must be defined in the regulations. If authority A were to transfer some headroom for a period of one year to authority B, would it be assumed that at the expiry of that one-year period, authority A had recovered that headroom, regardless of whether authority B had kept its side of the bargain and reduced its borrowing?

Nick Raynsford: The whole purpose of the transfer of headroom is for authority A to make available its spare capacity for the current year to authority B in exchange for some benefit in a future year, such as making available an alternative degree of headroom. That agreement would need to be defined between the two authorities and confirmed by their auditors.
 The hon. Gentleman is correct to say that there are regulation-making powers, and we will, after consultation with local government, set out broad parameters. We do not, however, intend to get into micro-management of that activity. The Government would not, and should not, be involved in that, because the overall effect would not be to increase total local government borrowing. As I said earlier, the arrangements are not dissimilar to those that exist under the present system for transfer of credit approvals. 
 The provisions are not odious, but are necessary as a prudent back-stop for a new system that will hugely extend the freedom available to local authorities. Local authorities will be able to borrow within a prudential framework, rather than being subject to borrowing control. They will take the decisions, and will be able to reflect their needs and circumstances by borrowing to meet those needs. That is a major advance, which local government welcomes. 
 I am sorry that the Opposition fail to recognise that that considerable extension of freedom to local government must be accompanied by limited safeguards to guard against extreme circumstances in which the exercise of those freedoms could create difficulties, either in terms of national economic management or the performance of a few local authorities. Those are no more than prudent safeguards, and I hope that hon. Members will not vote against them. If they do, I hope that the Committee will nevertheless confirm that clause 4 should stand part of the Bill.

Desmond Swayne: The clause is almost identical to the clause that appeared in the draft Bill, and it is that fact that has generated such strong representations to members of the Committee. I see from the agitated body language of many Government Members that they are as affected by those representations as we are. The answer proposed by my hon. Friend the Member for Runnymede and Weybridge is that we should vote against the clause. He is a wise man, but also a hard man in such respects.
 I should like to offer the Minister an opportunity to try to draw the sting of the opposition that has been caused by the fact that the Bill contains that almost 
 unamended clause. The Minister described the ''prudent safeguards'' as being for extreme circumstances, and said that such provisions were unlikely to be used. Given the lack of anything in the Bill, would it not have been wise—indeed, he still has an opportunity to do this—to give the Committee an exposition of the extreme conditions in which the powers would be used. 
 The prudential tests that apply to borrowing will clearly not provide any great scope for increases in capital expenditure. Therefore the key to affordability for local authority capital investment will remain the level of Government funding for that. The Local Government Association pointed out that the debate takes place against the background of an expected paper from the Government on the future of Government support for local authority capital finance. I had not known that. Would it not be possible for the Minister to draw some of the sting of the opposition to the clause by sharing with the Committee some insight into the details of that expected Government paper on local authority capital finance?

Nick Raynsford: Opposition Members' nice cop, nasty cop routine is a fascinating challenge to the normal stereotypes. I must tell the hon. Member for New Forest, West (Mr. Swayne) that I have already spelled out the extreme circumstances by describing the lamentable mismanagement of this country's economy by his noble Friend Lord Lamont a decade ago. I hope we will never return to that. As a prudent Government we have put these provisions in so that in the event of the country making a great mistake and ever again returning a Conservative Government there would at least be a safeguard.
Mr. Turner rose—
Mr. Hammond rose—

Nick Raynsford: The ease with which one can get a rise out of the Opposition is extraordinary.

Philip Hammond: The Minister may joke, but he has just said something very important. Is he ruling out the use of the power under section 4(1) for so long as his Government are in power?

Nick Raynsford: No. I am saying that we do not at present envisage circumstances in which the power has to be used because the economy is being well and prudently managed. As a prudent Minister, I cannot possibly anticipate what is likely to happen in the foreseeable future if there were to be major upheavals in the world economy that affected this country. It is right that these powers should be there, but we do not envisage using them. We do not anticipate their need but we think it prudent to put them in the Bill.

Philip Hammond: Does the Minister regard a halving of the value of shares quoted on the London stock exchange over three years as being a serious economic circumstance?

Nick Raynsford: It is a serious economic circumstance, but because the national finances have
 been so well managed by the Chancellor, we are in a stronger position than almost any other country in the world to weather an international storm. The hon. Gentleman is well enough versed in the movements of stock exchanges to know that what is happening in London is not unique. He will see similar trends in Tokyo, New York and Frankfurt. But the British economy is more strongly placed to cope with that than almost any other economy in the world. We do not see a need to use these powers in the foreseeable future, but it is wise that they should be there.
 The hon. Member for New Forest, West referred to drawing the sting out of the opposition. It may reflect my benign view of the world at the start of my 59th year, but it feels like a very minor prick by an irritating gnat. 
Mr. Turner rose—

Nick Raynsford: I give way to another hon. Gentleman.

Andrew Turner: I thought that the Minister was going to say another irritating gnat.
 As the Minister is prepared to contemplate the possibility of a future Conservative Government, will he also contemplate whether his reassurances that the powers would be used only in circumstances that he might describe as a crisis would apply to a future Government? Is he legislating for his Government or for a future Government, who may have different views about the use of these powers?

Nick Raynsford: I accept that, of course. I have already made it clear that we are legislating for the future, but in response to a question from the hon. Member for Runnymede and Weybridge I was happy to acknowledge that because of international factors such circumstances might arise in the lifetime of this Government. I am glad that I have given the hon. Member for Isle of Wight some comfort and that as a result of my remarks it is possible for him to contemplate a future Conservative Government. On that happy note, I urge the Committee to allow the clause to stand part of the Bill.
 Question put, That the clause stand part of the Bill:—
The Committee divided: Ayes 15, Noes 8.

Question accordingly agreed to. 
 Clause 4 ordered to stand part of the Bill.

Clause 5 - Temporary borrowing

Amendment made: No. 23, in 
clause 5, page 3, line 4, after 'by', insert 'or for'.—[Mr. Raynsford.]

Philip Hammond: I beg to move amendment No. 30, in
clause 5, page 3, line 8, after 'relates' insert 
 'and is reasonably expected to be received within that period.'.
 This is a technical amendment. Clause 5 gives local authorities the power to make temporary borrowing arrangements for managing their in-year cash flow, which is a sensible provision. The limit for borrowing for such purposes is effectively any amount due to the authority within the period, which it has not yet received. A local authority's receivables at any given time will include sums of money that will in practice not be collected. Until the Minister tells us differently, I will assume that an in-year receivable will include housing revenue account arrears, council tax arrears from previous years and 100 per cent. of the council tax due in the current year. No authority collects 100 per cent. of its council tax and some have a lamentable record of collection. 
 If the clause is to achieve what it intends, the additional words in the amendment are required so that the limit would be set by reference to amounts receivable within the current period and reasonably expected to be received. For example, an authority that has historically collected 96 per cent. of the council tax due will be allowed to take into account only 96 per cent., not 100 per cent. That is a sensible way to approach borrowing for in-year cash-flow management purposes; it must be based on real, anticipated receipts, not nominally receivable amounts that in practice everyone understands will not be received in full. I hope that the Minister will accept the amendment or undertake to deal with the issue in another way.

John Pugh: I have a technical query. The Bill's aim is to achieve prudential management. I agree with Aristotle that prudence is difficult to define and circumstantial. As it is defined in the Bill, prudence is setting and keeping to an authorised limit. Conservative Members argued in a previous debate that prudence sometimes consists of keeping clear of that limit because capital programmes can go wrong, mistakes can occur and it is always as well to have something in reserve. However, in temporary and exceptional circumstances it might be prudent to exceed that authorised limit.
 All of us, including CIPFA, accept that the Bill's goal is to attain long-term prudence. The amendment seeks a little precision in the authorised limit, which will be a firm, almost mathematical calculation, defined by a relationship between capital and revenue. The revenue base will include what is in the accounts and the money due, and we should consider what that means. Money due is not necessarily what the authority will get, but what it is legally entitled to. 
 My inquiry relates to the real world of local authority finance. Can money that may, for example, be subject to a negotiable bond be included, as well as 
 money due that is on the books? In circumstances in which a capital project has failed and a bond is to be negotiated, it will be contested in the court and arrive during the course of the year. Can a local authority reasonably include that as money due? Conversely, if there are contestable legal liabilities in the year, which the treasurer does not think will become due but which might do so, would they be included? I argue that they would not, because in the prevailing circumstances there is a strong element of over-programming, allowance for slippage and so on in local authorities. When financial issues hinge on legal issues that may be debated during the financial year, will the money be included in the money-due or the money-owed category?

Nick Raynsford: Clause 5 is a welcome and flexible provision to enable authorities to borrow temporarily when faced with deficits in income due to late payment of items including council tax, for example. To meet urgent commitments such as salaries, local authorities need to borrow short-term. The clause ensures that the authorities' borrowing limits in clauses 3 or 4 are increased by payments due to them in the financial year that have not yet been received.
 The amendment would add an unwelcome restriction. To increase the borrowing limit, the payment would not only have to be due but reasonably expected to be received in the current year. That would create two problems: first, the expression ''reasonably expected'' is vague and would add speculation to the process, possibly exposing the authority to a risk of litigation, particularly if litigious members of the public wanted to challenge the authority's financial management. 
 Secondly, there are timing difficulties. A payment becoming due in late March but not expected until early April, in the next financial year, would fall outside the provision, yet it is precisely in such a situation that the temporary borrowing capacity is crucial. The amendment is not helpful and it would not be welcomed by local government. 
 The hon. Member for Runnymede and Weybridge referred to local authorities having a lamentable record on council tax collection. However, the evidence is that local authorities are improving their collection rate, and we are seeing significant improvement throughout the country, even in the authority that, by universal agreement, had the most lamentable record. One and a half years ago, the London borough of Hackney had a collection rate of about 66 per cent., but I am told that it is now at 80 per cent. That is still far too low, but it is going in the right direction, which is a general trend in local government. I hope that the hon. Gentleman will give credit to local authorities for improving their collection rate.

Philip Hammond: I do not know what the Minister is waffling on about. I said that some local authorities have a lamentable council tax collection record. Frankly, I regard 80 per cent. as lamentable in the extreme, so there is not much to sing about in getting from 66 to 80 per cent. Other local authorities, including my own, have extremely good records, as
 one would expect of a Conservative-controlled authority.

Nick Raynsford: Like many other Labour authorities, my authority has an excellent collection rate, and we will not take any lessons from the Conservatives on that. I am sorry that I have got under the hon. Gentleman's skin this morning. I was making the point that in practice there has been demonstrable improvement in the collection rates, and even Hackney, which I openly said had a lamentable record, is improving. I do not deny that it has a long way to go, but it is moving in the right direction and should be welcomed.

Philip Hammond: Will the Minister give way?

Nick Raynsford: If the hon. Gentleman insists.

Philip Hammond: I am sorry that the Minister is so churlish about giving way, but I want him to clarify something. Was I right in my assessment that a crude arrears of council tax or housing rents would be included in the amounts considered to be due in the period in calculating the borrowing limit? If so, the Government will be allowing local authorities cumulatively to borrow what they have failed to collect.

Nick Raynsford: I was about to come on to the point about proper scrutiny and control of the use of the power to avoid abuse. Before I do so, I will refer to the contribution of the hon. Member for Southport. I understand his comments, but I hope that he will accept that we want to establish a flexible framework to assist local authorities to cope with the management of financial affairs without imposing unnecessarily restrictive provisions or too many details that could prove an obstacle to that flexibility.

John Pugh: Would it be reasonable for a local authority treasurer to take into account money to which he thinks that he has a fair, but not yet certain, legal title?

Nick Raynsford: That would be a decision for that local authority, after being advised by the treasurer, and it would be subject to audit. I hope that the authority would take a sensible and prudent decision in those circumstances, rather than expecting an answer from the Minister. As the hon. Gentleman will recognise, we want to devolve greater power and decision making to local authorities. I know that he supports that objective.
 On the safeguards, accounting principles applicable to local authorities require debts to be reviewed regularly and charges to be made to the revenue account for any that are considered bad or doubtful. The budgetary duty in turn requires the charges to be reflected in council tax. Therefore, a failure of the debtor to pay the council does not create an open-ended entitlement to borrow under the power. I accept that an authority might overestimate the extent to which it would collect council tax in one year and borrow under the power slightly more than it would reasonably be entitled to do because of that. However, that would be corrected in the following year, and the 
 borrowing would be kept under close and continuous monitoring through the framework that we want to see in place for the prudent management of local authorities' financial affairs.

Philip Hammond: I understand the Minister's comments, but there is no provision in the clause for estimating the percentage due to be collected. Let us take Hackney as an example. The Bill says that Hackney could borrow 100 per cent. of its due council tax receipts, even though experience tells it that it will collect only 80 per cent. I see nothing in the Bill to prevent that.

Nick Raynsford: The hon. Gentleman is making a mountain out of a molehill. This is not a long-term borrowing facility. It is a short-term facility to enable authorities to manage their cash flows. When a local authority takes such a decision, its chief finance officer will advise it as to what is prudent. Any chief finance officer aware of the history of Hackney's collection rate of council tax will not advise it to assume collection of 100 per cent. That would be extremely imprudent and I am sure that the auditors would have some robust comments to make on any such recommendation. I am confident that no such recommendation would be made. In the light of that explanation, I hope that the hon. Gentleman will not press his amendment.

Philip Hammond: I did not table this amendment with any aggressive intention. It was simply to clarify the issue. My perception is that in attempting to shoot down the amendment the Minister has pointed to a number of problems. I am sure he is right that a prudent local authority would take all those considerations into account, but in addressing the last clause he has invited us to look at the case of the maverick imprudent local authority. He used Hackney as an example, at least in its past incarnations. But there is a concern that an authority could use the short-term borrowing provision to borrow money that in practice it was not going to receive during the period. In effect, it would then be using borrowing to finance revenue expenditure, which is not the Government's intention.
 I take the Minister's point about prudent accounting practice requiring the writing off and charging to revenue accounts of uncollected amounts. In the local authority's accounts those amounts will be charged to a revenue account, but I take it that that does not mean that simply because an amount has been charged to a revenue account it is no longer collectable and enforceable against the debtor. I would expect a prudent local authority to charge to a revenue account an amount that had not been collected during the reasonable period in which it was supposed to be collected, but at the same time to continue to pursue the debtor. In that sense it would remain an amount due to the authority even though it had made appropriate provision for it in the revenue accounts. 
 The Minister said that the term ''reasonably expected'' was vague and incapable of precise interpretation. I frequently say in Committee that I am not a lawyer and I shall now say that I am not an accountant, but I would have thought that the term 
 ''reasonably expected'' was the type of phrase that accountants regularly had to deal with in deciding how properly to treat an amount; whether it was reasonably expected to be received. That is not a telling charge against the amendment as drafted. 
 I accept, however, that the Minister has made a better argument in dealing with receipts at the year-end, where he is right that some receipts would not be received within the period. I merely hoped that the Minister would take on board the issue underlying the amendment and seek to deal with it in another way. He has not shown any sign of being persuaded that there is an issue to address. I am not going to press the amendment for various reasons, including the defect in relation to year-end that the Minister has pointed out, but I hope that he will consider tightening the clause before Report stage. I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn. 
 Clause 5, as amended, ordered to stand part of the Bill.

Clause 6 - Protection of lenders

Question proposed, That the clause stand part of the Bill.

Philip Hammond: Will the Minister confirm that clause 6 merely reiterates the current state of the law following historic disasters that have befallen lenders?

Nick Raynsford: I am pleased to give the assurance that the hon. Gentleman seeks and to reassure him that I will not get into a lengthy ramble through the delights of Allerdale, Hammersmith and Fulham, interest rate swaps and all the other arcane issues of local government finance. As he identifies, the provision provides a safe harbour as per existing arrangements.
 Question put and agreed to. 
 Clause 6 ordered to stand part of the Bill.

Clause 7 - Credit arrangements

Edward Davey: I beg to move amendment No. 50, in
clause 7, page 3, line 22 at end insert— 
 '(c) the transaction is related to a 'private finance initiative' or a 'public-private partnership.'.

Derek Conway: With this it will be convenient to discuss amendment No. 32, in
clause 7, page 3, line 36, at end add— 
 '( ) The Secretary of State shall lay regulations before Parliament within 30 days of the coming into force of this section providing for liabilities under Private Finance Initiative contracts to be apportioned so that, where appropriate, a part of those liabilities are to be treated as a credit arrangement.'.

Edward Davey: Amendment No. 50 would ensure that, when the Government set the rules for credit arrangements for local authorities, PFIs and PPPs are on a level playing field with other credit arrangements. Having re-read the amendment, I can see that it may have one or two technical defects, which I am sure that the Minister will bring to the
 Committee's attention and for which I apologise. If there are technical defects, perhaps he will explain how we can get the amendment right. The intention behind it was certainly to try to ensure a level playing field for local authorities as they consider the different options.
 In the past, there has not been a level playing field. Many local authorities have been forced down the PFI route, in two main ways. First, PFI credits have been given special revenue support. The Government have encouraged local authorities to go down the PFI route by making extra money available on the revenue grant side. In addition, before the regime that is being put in place by the Bill, PFI borrowing was the only game in town for many authorities. They had no other option. In the past, therefore, PFI has been given special treatment. 
 As I have implied and the Minister will say, the Bill goes some way towards levelling the playing field. The prudential capital regime will give local authorities an alternative, but we do not yet know whether there will be a real level playing field. As far as we know, even under the Bill there may well still be some special treatment for PFI borrowing. Let me explain exactly what I mean. 
 First, as the hon. Member for New Forest, West said earlier, repeating a point made during our first sitting, we do not yet know what the revenue support regime for capital borrowings will be. The Minister said that we would know later this year, but my guess is that, when we receive that information, we will see that PFI borrowing will still receive special revenue support. He may want to take this opportunity to say that that will not be the case and that there will be a level playing field in respect of revenue support for all types of capital borrowing. If so, that will be news indeed, but I suspect that the discrimination in favour of PFI borrowing as opposed to other routes will remain. 
 Unless we make some reference to PFI and PPP in clause 7, there is a clear danger that PFI will benefit, because its arrangements apply not only to the purchase of capital assets, but to the related management services. There is a danger that PFI will again receive beneficial treatment. 
 The Liberal Democrats are not the only people suggesting that that is the wrong way to do things. The Government, in talking about capital investment and PPPs in chapter 4 of the White Paper, say: 
''The capital finance system itself should be neutral as to the form of procurement adopted and should ensure that authorities' purchasing strategies are based solely on considerations of best value.''
 Of course, the next paragraph contains a ''however''. It says that the Government still want to give special treatment to PFI, although they set out the principle that, in theory, there should be no difference in the way that capital and revenue regimes treat different forms of capital finance in respect of procurement. 
 The Audit Commission backed that up in a report that was published only last week. It considered the history of PFI in local authorities, particularly in respect of schools, and showed that PFI did not merit the special treatment that it was being given. Indeed, 
 the report recommended that we should move away from that system. It is particularly relevant to the debate because PFI in schools represents the largest proportion of PFI in local authorities. The report states: 
''In England, schools account by value for one-third of the total local government PFI commitment and are the single biggest component.''
 We should take the experience of PFI in schools and local authorities extremely seriously. Having looked at the history of PFI in schools and local authorities, the Audit Commission suggests that the PFI approach should be changed. It does not say that PFI should be abandoned. That is not the position of the Liberal Democrats either. The report says, however, that all procurement options should be treated in the same way by the financial regime. 
 Paragraph 66 of the report says: 
''Although all procurement options are technically open to LEAs, the practical barrier is the lack of an even financial playing field. It is time to review this lack of parity, particularly in light of the imminent introduction of prudential borrowing guidelines for local authorities and the concerted efforts being made to introduce new forms of PPP.''
 The report talks about opening up the option so that there is no discrimination. There we have it. The prime audit body for local authorities, as the Minister reminded us earlier, recommends that we should level up the playing field. While amendment No. 50 may not do that exactly, that is its intention. 
 This is an important debate, coming so soon after the Audit Commission's report, which referred directly to the clause. We have the chance to implement what it recommends for local authorities. I hope that the Under-Secretary will take the debate seriously. If he is not willing to accept the amendment because of its technical weaknesses, I hope that he can give us an assurance that, having considered the report and the debate, the Government will table amendments to ensure that the discrimination in the system in favour of the PFI is removed. Local authorities could then have the whole range of procurement options open to them in an even way and would not be forced down a particular route, which, as the report says, often may not be the best value for money.

Philip Hammond: Amendments No. 32 and 50 amendments seek to address the PFI exemption, if we can call it that, from the limits. Amendment No. 50 seeks to include all PFIs as credit arrangements. We have approached the issue in a slightly different way, but the intention is clearly the same. Amendment No. 32 is linked to amendment No. 36, to which we will come later. Amendment No. 36 would remove the power that the Secretary of State has under clause 8(4), which has been used to lay draft regulation 7(3)—the regulation that effectively exempts PFI contracts from this process.
 We have sought to analyse what a PFI contract is and to identify the fact that often one part of it will effectively be the procurement of a capital asset and another will be the provision of a service. If we are to 
 see through the structures that are put in place and look at the fundamental transaction, we must see a PFI arrangement as being a credit arrangement for the provision of an asset and then a services contract on top of that. Amendment No. 32 seeks to identify the part of the liability that is akin to a credit arrangement for a capital asset, and to treat it as being on a level playing field with other credit arrangements in terms of borrowing limits. However, it would allow the part of the PFI contract that represents the fee for the provision of services to be treated as a separate matter outside the constraints of the capital borrowing regime. 
 The problem with the approach proposed by the Liberal Democrats is that, by including the whole of the PFI arrangement within the areas to be taken into account in calculating the use of borrowing limits, there would be a danger of catching something that should not be caught—the provision of a service. For example, in a PFI contract for a building, the capital cost of the building element should properly be caught, but the provision of maintenance and support and security services should not. That latter element should be treated as more akin to revenue expenditure. 
 We accept, as the hon. Member for Kingston and Surbiton suggested, that it is wrong for local authorities to be pushed into particular forms of transactions because of the arbitrary exclusion of PFI liabilities from the calculation, but we believe that the solution is to divide the PFI liabilities into two separate component parts and to take into account the part that is similar in nature to a capital transaction. Draft regulation 7(3) would exempt PFI from the restriction on the use of credit for the provision of services, but would not address the capital element that might exist in a PFI contract. 
 A further concern that should be addressed in considering the clause is the apparent assumption that all leases are equivalent to liabilities. On the face of it, a lease is a liability, but it is possible that the asset has an offsetting value. An example would be a local authority that has a 20-year lease on a building that it partly occupies itself, but partly rents to a major supermarket chain. The whole cost to the authority of that lease over time should not be treated as a net liability. It is a gross liability, but it is offset by a net asset, in terms of the rolled-up stream of income that will be generated from the part of the building that is sub-let. I am not sure that the arrangements proposed by the Under-Secretary cover that, because they seem to me to treat the lease of all assets, including buildings, as a future liability to be rolled up and capitalised at the outset. 
 I would also like the hon. Gentleman to address the way in which the Bill proposes to treat PFI deals. The proposal would not only mean that PFI deals would be excluded from the capital controls but also, in practice, allow the hypothecation of a revenue stream in preference to the general creditors of the local authority for the provision of that capital asset. 
 Great play has been made elsewhere of the continuation of the arrangements whereby all local authority debt ranks pari passu. However, by financing an asset such as a building through PFI, 
 and thus making payments for the use of that building—not repayment of debt as would be the case if the money had been borrowed, but the payment of a service fee under a PFI contract—that obligation is ranked ahead of payments to other unsecured creditors of the local authority. That is important because, as the hon. Member for Kingston and Surbiton pointed out in another context, it is driving local authorities towards entering into certain forms of transaction rather than others. We believe that the Government should be neutral about the form that the transactions take. 
 I look forward to hearing the Under-Secretary's detailed analysis of why the clause is necessary. Everyone recognises the significance of PFI transactions and the use to which local authorities can put them, but the Committee is concerned about local authorities being steered in the direction of one type of transaction rather than another that would possibly not be in their best interest, if it were not for an artificial incentive provided by the clause.

Christopher Leslie: Amendments Nos. 32 and 50 would amend clause 7, which deals with the definition of credit arrangements. It should not be forgotten that there is also the context of the affordability test for the prudential borrowing regime. In both cases, the concern is with the treatment of contracts under the private finance initiative.
 Amendment No. 32 seeks to ensure that such contracts are included in the definition, and amendment No. 50 would classify all public-private partnership contracts and PFIs as credit arrangements. The hon. Member for Kingston and Surbiton, in his usual modest way, did down the technical efficiency of his amendment No. 50, and it is true that terms in the amendment—PFI and PPP—would have to be defined, probably lengthening the Bill. 
 Putting that to one side, the amendments are unnecessary and at odds with the strategy of clause 7. The Government's intention is to rely as far as possible on current accounting practice to determine what does and does not count as a credit arrangement. In the case of PFI, that means that a contract will be treated as a credit arrangement only to the extent that it has to be shown on the local authority's balance sheet. There is a test related to that, and that in turn depends on the degree to which risk is transferred to the private sector partner. Such an approach gives authorities an incentive to achieve a significant level of risk transfer when negotiating such contracts, and it may mean that some issues relating to how PFI will be treated will have to be clarified, as under the present system, but that can be best done in regulations. There is no need to refer explicitly to PFI in the Bill. 
 The hon. Member for Kingston and Surbiton mentioned the Audit Commission and its study into PFI in particular schools. I understand that that survey related to 17 pathfinder projects, since when we have had a further 500 or so PFI arrangements for schools. A lot of lessons have been learned from the 17 projects and the Audit Commission report, and I am confident that the new PFI arrangements have responded to the points that were highlighted. 
 I also believe that the new prudential regime will not force authorities down one route or another. It will give them the opportunity to consider not only PFI but other capital financing arrangements, and I assure the Committee that the credit arrangement clauses, and the new prudential borrowing regime in general, are about giving more flexibility and choice to local authorities.

Philip Hammond: If I understand the Under-Secretary correctly, he is saying that amendment No. 32 is unnecessary because subsection (2) provides for the apportionment of the cost of the PFI contract as an item that is a liability on the balance sheet and an item that is not. If so, will he make that explicit and, perhaps by using an example, show how that will work?

Christopher Leslie: This is the crux of the hon. Gentleman's argument in tabling the amendment. He seeks to split every PFI contract rigidly into the service and capital components. The best way to do that is to use the current accounting practice mechanism. Certainly in some cases when the balance sheet test is applied there are opportunities to have a separable component, such as when the service elements operate independently from the asset arrangements. I may be able to find specific examples at a later date. I am sure that the hon. Gentleman can think of some.
 I do not believe that it is easy as simply drawing that line down the middle of a long-term contractual arrangement. Current accounting practices look at the treatment of the whole of the contract and the extent to which risk is transferred to the private sector. Obviously, if the liability remains in the whole on the local authority, it will be classed as on balance sheet. There are plenty of circumstances where the treatment would be off balance sheet if the risk and the liability were similarly transferred to the private sector. I do not believe that a rigid approach requiring the separation in every case is necessary.

Philip Hammond: I am trying to follow the hon. Gentleman. I think that he is saying that it is not an apportionment but an either/or, based on an assessment of where the balance of the liability of the contract lies. Is he therefore saying—if he is, I confess that I have not understood this—that where a PFI contract relates primarily to the provision of the capital asset and, on current accounting practices, is deemed to be a liability that needs to be shown on the balance sheet, the whole of it is to be treated as a credit arrangement for the purposes of the clause?

Christopher Leslie: That may well be the case. The point about the provisions that we have set out is to give flexibility so that current accounting practices can in some circumstances see a PFI arrangement as being on balance sheet and in others as off balance sheet. Many of those variables depend on who is bearing the variation in the profits or losses related to the property concerned. For example, does the purchaser have access to be benefits of the property and, similarly, to exposure to the risks inherent in those benefits? Does the purchaser—the local authority—have liability to make payments to cover the costs of the property?
 Those are the issues that are considered in the balance sheet test. I believe that those accounting practices are the best ones to follow. They certainly ensure that each contract is treated on its merits.

Edward Davey: I do not think that any member of the Committee will have problems with normal accounting practices being applied in the way that the Under-Secretary described. He will know, however, that the clause provides regulation-making powers to spell out some of the details. That may be appropriate in view of the flexibility involved. However, I want to direct him to the core of my remarks. Will those regulations be drawn in such a way that PFI approaches have no extra benefit compared with other procurement options?

Christopher Leslie: Because we will not have the credit approval system under the new prudential borrowing regime, I do not believe that the current level of restriction will apply in future. We are in the process of drawing up the regulations in respect of the revenue provisions of capital. Those announcements will have to be made in due course. There are particularly good reasons in many cases to give an incentive for authorities to consider and look at PFI as a way of transferring risk, but also ensuring swifter delivery of a result that may be desirable for that area. In designing the arrangements, we do not want to exclude the possibility that we will want to look more favourably at supporting PFI arrangements.

Edward Davey: The Minister gave the clarification that I was about to seek. Is he therefore confirming that the Government are minded to give special treatment to PFI for local authorities in future?

Christopher Leslie: That is not necessarily the case. As far as possible we want to leave it to local authorities to take decisions on the contracts that they wish to enter into. The purpose of the set of clauses is to let go of the central controlling arrangement and to allow local authorities wider choices and more options in borrowing to benefit local people. PFI is one option in achieving that aim. The Government may highlight the benefits and virtues of a particular route, but the route that the local authorities choose to take is a matter for them.

Philip Hammond: The Minister talks about choice for local authorities. Could a local authority that was at its borrowing limit and therefore could not borrow to finance a project execute that same project by means of PFI? That is the litmus test of whether the system that the Government propose is biased in favour of PFI.

Christopher Leslie: I understand the hon. Gentleman's point. The clause will ensure that where the liabilities rest on the local authority through a PFI contract, they should be treated as credit arrangements and in turn be subjected to the affordability test in terms of their financing, just as ordinary borrowing would be. If a PFI arrangement is to be regarded as on balance sheet it will have to come within the local authority's affordability envelope. However, there may be circumstances in which a PFI arrangement transfers risk and liability to the private sector and thus it may
 be outwith the definition of a credit arrangement. In that situation the limit would not apply. I hope that is helpful.

Philip Hammond: The Minister is trying to be helpful and I am genuinely trying to understand him. Is he saying that in accordance with good accounting practice there is never a circumstance in which it would be appropriate to treat a single transaction as being made up of more than one component, one part of which might be treated as a liability carried on the balance sheet, for example, and another part treated in another way? The assumption that that might sometimes be the case was the reason for tabling amendment No. 32.

Christopher Leslie: No, I am not saying that. In some contracts there may be separable components in respect of service elements operating independently from the asset arrangements. I draw the hon. Gentleman's attention to accounting practice FRS 5, application note F, which has a section about the circumstances in which contracts might be regarded as separable.
 The hon. Gentleman made two points about leases and asked whether a lease's sub-lease could offset the liability. I am not entirely clear about that, although I suspect that the balance sheet test would also apply, and in some circumstances they too could be separable. If I am wrong, I shall write to the hon. Gentleman about it. 
 As to the hypothecation of a revenue stream with preference for a particular creditor, I would regard those as unusual circumstances where the council had more, rather than less, liability under that arrangement. The issue would rest on the level of risk transfer that was undertaken in respect of the person providing the contract. It would depend on what would happen if there were a default and on who would first bear the cost of remedying that default. If the hon. Gentleman wishes to pursue the issue, I will write to him. 
 I hope that the hon. Gentleman will accept my reassurances about the clause and withdraw the amendment.

Philip Hammond: I have listened carefully to the Minister and think that perhaps a little light is being shed on the matter. I liked the fact that the Minister appeared to be saying that what is proposed follows good accounting practice, and if a liability has to be carried on the balance sheet under good accounting practice it should be treated as a credit arrangement for the purposes of looking at compliance with borrowing limits. That seems to be sensible. However, I am not sure why the provisions are in the Bill; I thought that its general architecture supported the idea that accounting practices will prevail unless it is specified to the contrary. If we are all so keen to follow good accounting practices, I wonder why the Secretary of State needs powers to define something in subsection (2)(b), for example, rather than leaving it to accounting practice to ensure that things are treated as they should be.
 The Minister has persuaded me that amendment No. 32 is probably unnecessary. I shall leave it to the 
 hon. Member for Kingston and Surbiton to talk about amendment No. 50. The Minister has not persuaded me that clause 7 is necessary. In demolishing the argument for amendment No. 32 he also demolished the argument for clause 7, as he made a good case for relying on standard accounting practice.

Edward Davey: I agree with the hon. Gentleman that this has been a useful debate and that the Under-Secretary has been helpful in explaining some of the Government's thinking on the matter. However, I am disturbed by some of his remarks, as it seems to be the Government's intention to retain bias towards PFI in the system. The Under-Secretary was not explicit, but he said that when the Government eventually publish their thinking on revenue support for capital finance in local authorities they may decide to give extra support for PFI borrowing. Many people outside the House will be concerned that the Government are taking that route, despite the evidence from the Audit Commission and others.
 The Under-Secretary referred to the first 17 schools, but the report, which is very authoritative, considers the matter in detail. It looks at the PFI experiments and new school buildings across the piece, comparing PFI with more traditional options. Although the conclusion omits the fact that as the experience of using PFI in schools continues, lessons will be learned and the practice will improve, its recommendations are clear: it wants barriers and restrictions to other forms of borrowing removed so that there is a level playing field. The thrust of the Minister's remarks was that the Government would not adopt that proposal. While the hon. Member for Runnymede and Weybridge was speaking, I read the notes on regulation 7, which state that 
''the Government still wishes to encourage the use of Private Finance Initiative contracts, where they represent best value. PFI contracts are credit arrangements which provide the authority not only with a capital asset but also with associated services.''
 That suggests that the Government are keen to give PFI special treatment. I accept that amendment No. 50 would not get rid of that special treatment, but this has been a useful debate to tease out the latest Government thinking on the matter. I will not divide the Committee on the amendment, as we will return to the issue. It worries many people, especially when the Government are not following the Audit Commission's recommendations. I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn. 
 Question proposed, That the clause stand part of the Bill.

Philip Hammond: Two issues remain outstanding. While the hon. Member for Kingston and Surbiton was speaking, I was looking at the notes to regulation 3, which slightly undermine the Minister's remarks. It is disappointing, Mr. Conway, that the Minister does not have the explanatory notes to his own regulations. I will be happy to give him a copy when I have finished referring to them. The thrust of what he was saying is that standard accounting practice should determine how the capital controls
 provisions are implemented. The notes to regulation 3 specify that all property leases will be included
''within the definition of 'credit arrangements' ''.
 They continue: 
''although many leases would be caught automatically by''
 the test of proper accounting practices, 
''not all have to be shown in the balance sheet. The regulation therefore ensures that leases of any kind are taken into account for the purposes of the authority's prudential limit [clause 3] and any limits that might be imposed by the Government [clause 4]''.
 Given that the general thrust is to go with the flow of proper accounting practices, the Minister will have to explain why in his draft regulation he proposes to include all property leases within the scope of credit arrangements. That only highlights the issue we have been debating, because it will create a perverse incentive to organise the supply of operational buildings by way of PFI contracts that may not otherwise be in the local authority's best interests. 
 Bear in mind, Mr. Conway, that typically an operational building will have a long life, and even a prudent authority might question whether it wants a lease of 20 or 25 years chewing up a chunk of its borrowing limit. If it were to enter a PFI-type transaction, as I understand the Minister, that might not fall to be counted against that borrowing limit. We need an explanation from the Minister as to why property liabilities have been determined by the draft regulation to be counted always as a credit arrangement.

Edward Davey: The hon. Gentleman may have a point, if I have understood him correctly. Is he saying that with the new regulations the leases to which he refers will be treated differently from the way they were treated previously and therefore the incentive to use PFI for the provision of buildings will increase?

Philip Hammond: That must be the import of the notes. They say:
''although many leases would be caught automatically . . . not all have to be shown in the balance sheet''.
 It is for the Minister to tell us how this proposed treatment relates to the current treatment. It would be useful to the Committee if he could clarify that. My interpretation is that this is a decision by the Government to ensure that all property leases are included as credit arrangements. 
 I raise the second issue in the spirit of a Committee scrutinising the fine detail of a Bill. Local authorities unhappy about the controls imposed on them might not thank me for raising the question whether a loophole is inadvertently being created, but it is our duty as Committee members to look for anything that may have slipped past the Minister's eagle eyes. 
 If the Government's intention through the clause and the inclusion of credit arrangements is to avoid creating an alternative to borrowing against the prudential limit, is the Minister sure that he has not inadvertently created a loophole in subsection (3)(b)? It excludes from the definition of a qualifying liability 
''a liability in respect of which the date for performance is less than 12 months after the date on which the transaction giving rise to the liability is entered into''.
 I invite the Under-Secretary to consider the transaction for the leasing of an asset such as a motor vehicle over three years. If I understand subsection (3)(b) correctly, the liability for borrowing purposes will be taken to be only the second and third years' payments under the credit arrangement, not the first year's payments. Let us say that the vehicle is a refuse collection vehicle and the authority borrowed to buy it—if there are any local authorities that still collect their own refuse. The whole of the borrowing cost would fall to be counted against the borrowing limit. 
 I believe that a creative local authority treasurer might be able to use the exclusion—I understand the reason for it—of the portion of the liability that falls due in the current period. That would generally be treated differently on the balance sheet, but it potentially opens up a loophole, and I should be grateful for the Under-Secretary's observations.

Edward Davey: The great thing about a clause stand part debate is that it is a process and we can catch up on ourselves. Since I last spoke, I have been studying more carefully some of the regulations that apply to the clause, and I have noticed—perhaps I should have noticed earlier—that regulation 7(3), which is in draft form, clearly specifies that private finance initiatives will be treated differently. Although the explanatory notes say that the exemption is currently in operation, regulation 7(3) continues it, which confirms the fear that I expressed earlier that the clause and the regulations created by it will embed the bias towards PFIs.
 Many of us share that concern. We openly agree that flexible credit arrangements and a range of options for local authorities are needed. Those freedoms are needed, but if they involve a residual control or a residual direction where there is a clear financial benefit as between one option and another, the Government are not giving local authorities real, meaningful freedoms and they are going against the experience and analysis of bodies such as the Audit Commission. 
 I hope that the Under-Secretary will say that the Government will go away and reconsider that point. I hope that they will admit that the prudential capital regime that they are establishing is not sufficient to level the playing field and that they are indeed deliberately retaining the discretion to benefit PFI.

Christopher Leslie: The hon. Member for Runnymede and Weybridge raised a number of specific points. He smiled at the fact that there was no notice of them and that that was an interesting way of putting the Minister on his mettle. As I try to answer those points, he may well be proved right, but I will try my best to give him answers.
 First, however, let me put the clause in context. As I have said, it deals with credit arrangements, a term that has been used since 1990. It may be helpful if I say something about the history. Before 1990, more basic capital finance controls were in force. These regulated capital expenditure financed by borrowing, but 
 authorities found other ways to access capital assets, and many authorities obtained buildings and other property by leasing. Another popular device was the so-called deferred purchase agreement, a sort of hire-purchase scheme for buildings. At that time, those transactions were outside the capital controls. Therefore, when the present capital finance system was introduced in 1990, one of the main aims was to place borrowing and other sorts of credit on an equal footing, and that was done effectively, although in a highly complex way. 
 Leasing and all other forms of long-term credit are now covered by the term ''credit agreement'', and any authority entering into a credit agreement must work out the total amount that it will pay throughout the whole contract. The lump sum is then treated notionally as if it were being borrowed now and so, as with actual borrowing, the credit arrangement is controlled by the number of credit approvals issued to the authority by the Government. 
 The experience of the 1980s shows that we cannot regulate borrowing alone. Authorities' financial performance is generally far more responsible and professional than in those days, and it is that achievement that makes it right for us to offer them the new freedoms contained in the Bill. However, if we focus only on borrowing, we will undermine the safeguards provided for in clauses 3 and 4. The references in those clauses to borrowing limits must therefore be extended to cover credit as well. 
 Clause 7 sets the scene for that, by preserving the idea of a credit arrangement, but greatly simplifies the definition. We have taken that simplification still further since the Bill was first issued for consultation. That was possible because the local government accounting framework has itself become more robust since 1990, and any transaction with the same effect as borrowing will generally be treated in the accounts as if it were borrowing. That means that we can safely dispense with the cumbersome definitions contained in the 1990 legislation and instead can rely mainly on accounting concepts. 
 A credit arrangement is therefore defined in clause 7(2) and 7(3) as a transaction giving rise to a long-term liability in accordance with proper practices. ''Long term'' means 12 months or more, and the expression ''proper practices'' has the meaning given in clause 21(2). 
 The hon. Member for Runnymede and Weybridge raised several specific points. With regard to leases, he highlighted concerns about the notes on regulation 3. It is true that there are specific regulations covering leases, but those should be put in the context of the other regulations. The hon. Member for Kingston and Surbiton, on closer scrutiny, discovered that paragraph (3) of regulation 7 provides for specific accounting arrangements with regard to PFI, and I believe that those go some way towards answering the point made by the hon. Member for Runnymede and Weybridge. He might regard those arrangements as PFI, but we view them as leasing.

Philip Hammond: Paragraph (3) of regulation 7 deals specifically with the prohibition on borrowing to
 finance revenue expenditure on service provision, and allows a PFI contract even if it might otherwise be treated as borrowing for those purposes. That regulation does not address the need to include a specific provision in regulation 3 stating that a lease of a property should always be treated as a liability, regardless of whether good accounting practice would require it to be treated as such. That cross cuts to the earlier question that I put to the Minister for Local Government and the Regions and to which he replied, about a situation in which a local authority had a liability under a lease, but also had an offsetting income stream, if, for example, part of the property was sub-let. It appears to me that regulation 3 automatically requires that the liability be treated against the authority's capital borrowing limits. That would not necessarily accord with good accounting practice.

Christopher Leslie: No. I endeavoured to explain earlier that that was not the case. Some property leases may not necessarily score as on the balance sheet, but we do wish the system to cover all leases, as it does now, to avoid any perverse incentives that might arise and lead a local authority to think that leasing was a worthwhile activity over and above the other areas that were proper for it to undertake. The only test that we want to see is the value-for-money test, which is included. That is why we have covered all leases in the regulations.
 The hon. Gentleman also asked whether a loophole might exist in regulation 7(3)(b) about, for example, the purchasing of a vehicle juxtaposed with the borrowing of a vehicle. Regulations will ensure that short leases that are expected to be renewed will be treated as long-term leases. Indeed, parallel provisions in regulation 6, which concerns options, work to close down loopholes and the treatment of various undertakings that might try to circumvent issues in another way.

Philip Hammond: I can see how the Under-Secretary might want to use the options provisions to deal with bogus short leases that are in fact longer leases, but I ask him to consider the situation of a genuinely short lease on an asset with a three-year life. My understanding is that if it is borrowed for, 100 per cent. of its costs would be treated against the borrowing limit. If it is obtained under a credit arrangement, only two thirds of its cost will be treated against the borrowing limit. Is that correct?

Christopher Leslie: The hon. Gentleman needs to see the provisions in the context of their purpose, which relates to the prudential borrowing regime and the affordability limits and tests as set out in clauses 3 and 4. It would be wrong to calculate the consumption of credit in that way. The calculations under the code, perhaps because of affordability or for national economic management reasons, will pick up all the revenue consequences of the arrangement. The fact that all the revenue consequences will be covered in the calculation of the affordability limit provides a safeguard and ensures that the affordability test and arrangements in clauses 3 and 4 will operate properly.
 The hon. Member for Kingston and Surbiton asked why the PFI provisions under draft regulation 7(3) are needed. They are included to ensure that the accounting practices and balance sheet tests can be regarded properly. When we come to clause 16 on capital expenditure, we will debate the various ways in which generally accepted accounting practice may vary from local authority accounting practices. That will help elaborate on some of the issues for the hon. Gentleman. The regulations are needed for a common-sense treatment of private finance initiative arrangements under the normal accounting practices test in the Bill.

Edward Davey: I am sorry to press the Under-Secretary, but the impact of regulation 7(3) is that PFI services for schools can be paid for through a credit arrangement while services from a normal procurement route cannot. There is a clear financial differentiation and benefit given to PFI. The hon. Gentleman has not admitted or justified that.

Christopher Leslie: The hon. Gentleman should take a step back from looking at the details of one particular contract. Ordinary borrowing arrangements would simply provide the asset for the authority and would be accounted for in the normal way, but the PFI mechanism, depending on its components and balance of risk, has a reflection on whether it accounts on or off the balance sheet. The regulations ensure restrictions on the nature of the credit arrangements that can be entered into by ensuring proper boundaries and limits. That also encapsulates some forms of PFI arrangements and classes them fairly in circumstances in which they are defined as credit arrangements and count towards the affordability limit. Those are set out, and there will be opportunities in debating a later clause to consider the definitions of accounting practice. If the hon. Gentleman has any specific points, I undertake to find answers then.
 I hope that the Committee will regard the clause as robust and necessary in ensuring that credit arrangements are part of the prudential borrowing regime. I commend clause 7 to the Committee. 
 Question put and agreed to. 
 Clause 7 ordered to stand part of the Bill.

Clause 8 - Control of credit arrangements

Amendment made: No. 24, in 
clause 8, page 3, line 40, after 'by', insert 'or for'.—[Mr. Leslie.]

Philip Hammond: I beg to move amendment No. 33, in
clause 8, page 4, line 3, leave out 'cost of' and insert 
 'capital value of the assets made available under.'.

Derek Conway: With this it will be convenient to discuss the following amendments:
 No. 34, in 
clause 8, page 4, line 5, leave out 'cost of' and insert 
 'capital value of any additional assets made available under the arrangement as a result of'.
 No. 35, in 
clause 8, page 4, line 7, leave out from second 'the' to 'and' in line 8 and insert 
 'capital value of an asset'.

Philip Hammond: Amendment No. 33 is designed to probe the Government's proposals. Clause 8(2) says that, in applying the borrowing limits,
''for the purposes of subsection (1) . . . entry into a credit arrangement shall be treated as the borrowing of an amount of money equal to the cost of the arrangement''.
 Amendment No. 34 would delete the words 
''cost of''
 and insert the words 
''capital value of the assets made available under the arrangement''.
 I expect that the Minister's response will be that the Bill will work as the amendment suggests. If so, we need only an explanation of precisely how. 
 The cost of the arrangement should not be treated as the equivalent of the borrowing costs. When a local authority borrows £1 million, we do not treat it as having borrowed the £1 million plus the interest to be paid over the lifetime of the loan. We treat it as having borrowed simply the capital amount. Similarly, if a local authority chooses to enter into a credit arrangement instead of borrowing, we should treat the equivalent sum to be set against the borrowing limit as the capital value of the assets to be acquired or used under the credit arrangement. That should be self-evident. 
 The provisions in subsection (3), which allow the Secretary of State to define by regulations the calculation of the cost of a credit arrangement, may mean that the provision in subsection (2)—that the cost will equal the cost of the arrangement—is undermined. We already have draft regulations before us, which I am afraid do not help me in trying to get to the bottom of the matter. Regulation 5 says that, for the purposes of clause 8(2), 
''the cost of a credit arrangement or variation of a credit arrangement shall be the amount of the liability in respect of that arrangement or variation which is shown, in accordance with proper practices, in the authority's accounts.''
 My question to the Minister will undoubtedly ask him to draw on the detailed briefing on accounting standards that he will have had in preparation for the Committee. Will he say whether the amount that would fall under draft regulation 5 to be treated as the cost is only the amount equivalent to the capital value of the asset and excludes the amount that is akin to a debt service cost if the asset or use of the asset were financed by conventional borrowing? If so, I suspect that my amendment is redundant, but it means that the Bill is extraordinarily obtuse. Subsection (2)(a) is specific and will appear clear to the layman—that the amount is to be 
''treated as the borrowing of an amount of money equal to the cost of the arrangement''.
 The clause then gives the Secretary of State the power by regulation to redefine the cost of the arrangement. 
 It would be better if it were explicit in the Bill that the amount of money to be taken into account is equivalent to the capital assets made available under the arrangement. I shall be content to thunder against the obscurity of the drafting rather than the substance if the Minister confirms that the amendment is redundant, because the provision I have sought is in fact provided for under draft regulation 5.

Andrew Turner: I, too, was mystified by the meaning of ''cost'' in the clause, largely for the reasons set out by my hon. Friend the Member for Runnymede and Weybridge. I was also slightly concerned by his alternative definition of the capital value of the assets made available, but I shall return to that in a moment.
 The cost of the arrangement could have the meaning set out by my hon. Friend: the aggregate borrowing, plus the cost of interest and other repayments, plus the fees involved in setting up the arrangement; or it could refer merely to the fees in setting up the arrangement. I, too, would like to hear from the Minister which of those definitions he intends should be covered by ''cost'' on the three occasions on which it occurs in the clause. 
 My hon. Friend's alternative proposal suggests that borrowing by local authorities is designed to create an asset. On many occasions borrowing by local authorities is designed to pay for a liability, not to create an asset and certainly not necessarily to create an asset of a value equivalent to the amount of money borrowed. 
 Let me give you an example, Mr. Conway. If a local authority borrows money to build a house on a piece of reclaimed land, it is more than likely that the value of the house on the open market will be less than the aggregate cost of building the house and reclaiming the land. In other words, the asset's value is not equivalent to the sum borrowed, let alone the sum borrowed, plus the interest paid, plus the costs of the arrangement. 
 A second example might be for the construction of an ice rink, swimming pool or other facility. As many of us who have served on local authorities know, ice rinks, swimming pools and other facilities have huge maintenance costs. Sometimes local authorities have to pay the private sector to take these wretched facilities off their hands because the maintenance costs are so great. It cannot therefore be construed that the capital value of the asset made available under the arrangements is equivalent to the cost of making the arrangement or the value of the sum borrowed. 
 Then there is the cost of a coastal protection measure. A coastal protection measure has no intrinsic or asset value. It only has a value in terms of the amount of money spent on it. I would like to ask the Minister, in responding to the amendment, to clarify what is meant by ''cost'', which is the thrust of the amendment. I have been a little critical of my hon. Friend's alternative, but perhaps the Minister could do what my hon. Friend has valiantly tried to do. I believe an amendment is required.

Christopher Leslie: What a pleasure it was to hear the hon. Member for Isle of Wight try to help the hon. Member for Runnymede and Weybridge. In many ways, he said what I was about to say about the amendments and the phrase
''capital value of the assets''.
 The amendments relate to clause 8, which is mainly about the calculation of the cost of credit arrangements. It enables the details of what is inevitably a somewhat technical procedure to be covered in regulations, and we have provided the Committee with copies of the draft regulations. 
 As the hon. Member for Runnymede and Weybridge pointed out, regulation 5 indicates what we have in mind. The cost of the credit arrangement is to be decided as far as possible by accounting practice, rather than by special rules devised by us. It will normally depend on the amount of the long-term liability under the new contract as shown in the accounts. That will reflect the value of the payments that the authority is committing itself to make over the life of the contract. A broadly similar effect is achieved under the present system, but only with extremely complex rules and formulas in the legislation. The present principle is sound, but we hope to achieve the same result much more simply through reliance on accounting concepts. 
 Amendments Nos. 33, 34 and 35 suggest an alternative way of calculating the cost of a credit arrangement, by reference to the capital value of the assets made available under it. I accept the amendments in the spirit in which they were intended—as probing amendments designed to tease out what the Government mean. I will not seek to demolish them on technical grounds.

Philip Hammond: Go on, try.

Christopher Leslie: Most of the demolition job was done by the hon. Member for Isle of Wight, who speculated on the definition of costs and mentioned what would happen if the borrowing cost were different from the capital value of the asset. As anyone who has a mortgage knows, certainly from the experience of negative equity under a previous Administration, the amount borrowed will not necessarily equal the value of the asset.

Philip Hammond: The Under-Secretary's point is irrelevant. The Bill refers to
''the cost of the arrangement''.
 In a credit arrangement, that will be the value of the asset, the cost of the asset, plus the servicing costs over the life of the arrangement. The fact that the asset may have a declining value will not affect the payments that have to be made under the credit arrangement. I am trying to get at whether it is appropriate that the element of the credit arrangement that is tantamount to the debt service cost should be included in the capital value in the case of a credit arrangement, although it is not included where the local authority borrows and purchases the asset. In that case, only the amount of borrowing, not the stream of debt service costs, will count against the borrowing limit.

Christopher Leslie: I take the hon. Gentleman's query seriously, but my concern, which must be considered in the context of the prudential borrowing regime and the affordability test, relates primarily to the affordability of such contracts. The most direct way of assessing that is to consider what the authority will pay. There is not necessarily a close link between asset value and the amount that the authority will pay. I think that the amendments confuse asset value with that liability set up to represent the credit arrangements. Values may rise in relation to the market, or decline, but the financial obligation at the outset to undertake the payments is not necessarily affected by those market changes. The example given by the hon. Member for Isle of Wight was interesting, although I would not necessarily describe ice rinks as ''wretched facilities''. In my youth, I had a soft spot for the occasional visit to Bradford ice rink—[Interruption.] Although the ice was not very thick at the time, I never fell through it.
 I believe that the provisions in the clause, and the arrangements that define the cost of an asset, are sound. It would be wrong to look at the capital value of the asset in a similar way as described by the hon. Member for Isle of Wight. I urge the hon. Gentleman to withdraw the amendment.

Philip Hammond: We have not got very far. I would dispute what the Under-Secretary said. The phrase I used in the amendment is the
''capital value of the assets made available under''
 the arrangement. I entirely agree that the capital value of the assets might go up or down over time. However, the capital value of the assets when the arrangement is entered into jolly well better be equivalent to the amount that the authority is committing itself to paying over a period. The Minister for Local Government and the Regions shakes his head, but I should have thought it would very ''unprudential'' of a local authority to enter into a credit arrangement in respect of an asset if that credit arrangement contemplated payments based on a value of the asset that was higher than its value when the arrangement was entered into. I would not expect a local authority to borrow a sum of money to purchase an asset at more than its value at the time when it purchased it. 
 In focusing on value as against cost, we have perhaps missed the critically important issue. I am asking the Under-Secretary to compare two ways of financing a transaction. Take the purchase of an asset with a five-year life and a zero anticipated value at the end of that life. As I understand it, if the local authority borrows £1,000 to buy that asset its borrowing limit is debited with £1,000 only, not £1,000 plus the interest payments that it will make over each of the five years of the life of that arrangement. Only the capital costs will be taken into account. The debt service costs will not hit the authority's borrowing limit. 
 If the authority enters into a credit arrangement, a leasing arrangement for that asset over the five-year period, the amount to be debited to its borrowing limit will be the total payments to be made to the provider of that asset over the life of that credit arrangement. If 
 this is an asset with a zero value at the end of the five-year period, the amount to be paid over the life of the credit arrangement will be the capital cost of the asset on day one, plus the interest charge that the provider will levy throughout. That seems to create a situation where if the local authority borrows and buys the asset the charge is £1,000, but if it enters into a credit arrangement the charge against borrowing limits will be £1,050 or £1,100, whatever the interest rate being charged. 
 That seems a most bizarre way to approach a credit arrangement. It is effectively to roll up the finance cost with the capital costs of the asset provided and treat it all as if it were akin to money that would be borrowed if an authority purchased something outright. That is the key issue, which the Under-Secretary has not addressed. As with earlier issues that we have discussed, that would steer local authorities away from credit arrangements towards straightforward borrowing. The whole of thrust of what the Government say they are trying to do and what the Opposition want to achieve is removing artificial incentives or disincentives to local authorities to 
 enter into one type of transaction or another and to give them the freedom to look at the range of options available to them and to decide which is most appropriate.

Christopher Leslie: I can only seek to explain as far as I can the specifics of the point that the hon. Gentleman has now raised, which is slightly different from the amendments. [Interruption.] I cannot be sure what was intended by the amendments. My understanding is that there is a level-playing-field treatment of the cost of a credit arrangement to borrowing, insofar as the prudential regime test examines the revenue obligations that fall on an authority in making those payments, whether by normal borrowing arrangements or by credit agreement. Given that servicing costs are excluded from the cost of a credit arrangement, we are looking at the proportion of that credit agreement that falls on the authority's revenue commitments in one year—
 It being twenty-five minutes past Eleven o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order. 
 Adjourned till this day at half-past Two o'clock.